Bankruptcy is a legal remedy that allows people who are in overwhelming debt to their creditors to either eliminate those debts or establish a repayment plan. While bankruptcy is sometimes used as a way for people who were careless with their money to find an easy way out, the majority of people who choose and quality for bankruptcy are trying to wipe the slate clean so they can reset their financial future.
Typically, individual filers can qualify for two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is often known as ‘liquidation bankruptcy,’ because your property is eligible for sale (liquidation) to pay off some or all of your debts. Chapter 13 bankruptcy requires you to create a repayment plan that will satisfy all your creditors. Deciding which type of bankruptcy to file depends on your existing income as well as the amount of your secured and unsecured debt.
One of the biggest questions people have when they file Chapter 7 bankruptcy is whether they will lose their homes and their vehicles.
The answer is that it depends on whether or not your payments are current when you file for bankruptcy and whether you have any equity in your home that can be protected from creditors.
If you are not current on your house and/or vehicle payment, you should talk to an experienced attorney before you file for Chapter 7 bankruptcy.
If you are current on your payments, it is quite possible to keep your home or your car after filing Chapter 7. In order to keep your home, however, you must have equity in it, which means your house must be worth more than what you owe.
In a Chapter 7 bankruptcy, that equity is categorized as an asset, which means your house can be taken and sold to pay creditors if it’s not eligible for what is known as the Homestead Exemption.
In Colorado, the Homestead Exemption is $60,000, which increases to $90,000 for the elderly or the disabled. That means that if your home equity is more than $60,000, you can use the exemption to keep it from being sold.
But if your equity is only $30,000, your home can be sold in a Chapter 7 bankruptcy.
The same principle applies to vehicles. The vehicle exemption in Colorado is $5,000, which increases to $10,000 for the elderly or the disabled. That means that if your car is valued at $25,000 with a loan of $15,000, its equity value is $10,000 and would be exempt from being sold.
In Chapter 13 bankruptcy, if you are past due on mortgage or a vehicle, you can roll those debts into the repayment plan, and keep that property from being foreclosed or repossessed.
It is always more advantageous for you to file Chapter 13 before your home is in foreclosure or before your car is in repossession, because otherwise, your lender has the power to reinstate the original terms of your loan instead of agreeing to the more favorable terms of your repayment plan.
But filing Chapter 13 allows you to get caught up on your mortgage payments, and also lets you stretch out the length of your car loan payments as long as the vehicle you own is at least two-and-a-half years old.
Bankruptcy exemptions for homes and vehicles can be complicated and confusing, so it’s always best to consult an experienced home, car and bankruptcy lawyers. Please contact Kinnaird Law to schedule a free consultation.